Reforms to the Food and Grocery Code – how will supermarket suppliers be better protected?

Following the public outcry earlier this year over supermarkets failing to pass on cost-savings to consumers as prices paid to supermarket suppliers were falling, the Government commissioned Emersen’s review of the Code. The review formed part of a string of inquiries sparked by the cost-of-living pressures facing Australian consumers. Having completed his review of the Code, Emerson published his final report on 24 June 2024 and the Government immediately confirmed that it will adopt all of Emerson’s recommendations.

Why does the Code need to change?

It’s hardly surprising, but Emerson found that the existing voluntary Code has been largely ineffective. This is mainly attributed to the lack of available fines or penalties under the Code to punish non-compliant supermarkets, which has ultimately rendered it a “toothless tiger”. On top of this, most suppliers are too fearful of the retribution that might follow if they peer over the precipice and make a complaint under the Code.

How will the revised Code drive better behaviour by supermarkets?

Dr Emersen’s recommendations seek to combat the imbalance of power between supermarkets and suppliers by:

• mandatory compliance: making compliance with the Code mandatory to ensure that it applies to all major supermarkets with annual turnover greater than $5 billion (currently, Woolworths, Coles, ALDI and Metcash); and
• penalties: arming the ACCC some serious ammunition by imposing hefty penalties for breaches of the Code.

How big will the penalties be under the mandatory Code?

• For major or systemic breaches of the Code, the maximum penalty will be an amount equal to the greater of $10 million, three times the benefit gained from the breach, or where the benefit cannot be determined, 10% of turnover in the 12 months preceding the breach.
• For other breaches of the Code, the maximum penalty will be just over $1 million.
• The ACCC will also have the power to issue infringement notices of up to $187,800.

These penalties will be the most significant of any industry code of conduct in Australia.

How will the Code overcome supplier fears of retribution?

The fear of suppliers is real as they dodge retributory conduct by supermarkets in the form of less-advantageous trading terms, reduced orders, poorer shelf location, limits on distribution across stores and de-listing. To overcome this, the Code will introduce an anonymous complaints mechanism to enable suppliers to make complaints directly to the ACCC. Other measures to address supplier fears of retribution will include:

• ensuring the obligation to act in good faith includes action taken against suppliers for exercising their rights under the Code generally (i.e not just in relation to disputes or complaints);
• making breaches of the obligation to act in good faith subject to the highest maximum penalty of $10 million;
• requiring that incentive schemes and payments to a supermarket’s buying team and category managers are consistent with the Code; and
• requiring supermarkets to have systems in place for senior managers to monitor the commercial decisions made by buying teams in respect of a supplier who was pursued a complaint.

What other changes are on the horizon?

• Wholesale suppliers: In a win for wholesale suppliers, the mandatory Code will protect all suppliers, including fresh produce wholesalers and meat processors. Currently, there is no requirement for supermarkets to enter into a code-compliant Grocery Supply Agreement with such a wholesaler.
• Suppliers of fresh produce: Emerson recognised that suppliers of fresh produce are more vulnerable due to the perishable nature of their goods. To better protect them, the mandatory Code will require that where a Grocery Supply Agreement does not specify a price for their goods, it must include the basis for determining prices. In addition, supermarkets will be required to exercise due care in forecasting required volumes of fresh produce and fresh produce standards and specifications imposed by supermarkets will need to be reasonable.
• Exceptions to Grocery Supply Agreement: The voluntary Code prohibits specified conduct in the commercial dealings between supermarkets and suppliers. Many of these prohibitions are subject to exceptions which often apply when the exception is set out in the Grocery Supply Agreement. For example, under the voluntary Code, a supermarket can unilaterally vary the Grocery Supply Agreement if the agreement expressly states that it is allowed to do so and the variation is reasonable. Under the mandatory Code, all obligations under the Code that have exceptions will be subject to a reasonableness requirement and, in determining reasonableness, the Code will require regard to be had to the benefits, costs and risks to the supplier and the supermarket. Further, it will be made clear that the supermarket bears the onus of proof that an exception is reasonable. To assist suppliers better understand any exceptions, all new Grocery Supply Agreements will be required to include a simple guide that explains them.
• Dispute resolution: Supermarkets will be required to appoint a code mediator who must be available to assist with resolving disputes when requested by a supplier. Arbitration will be available where agreed between the supermarket and the supplier. Helpfully, Woolworths, Coles, ALDI and Metcash have agreed in principle to participate in arbitration when requested by a small supplier and have agreed to be bound by a decision of the arbitrator involving compensation for the small supplier of up to $5 million.

What’s next?

The Code changes will require amendments to the Competition and Consumer Act 2010 (Cth). We will keep you updated with the legislative developments and timing. In the meantime, suppliers can take a collective sigh of relief that supermarkets will have a much greater incentive to toe the line when it comes to complying with the Code. If they don’t, suppliers will have the option of making an anonymous complaint to the ACCC.

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